ESMA’s Ross urges louder buy-side voice

The executive director of Europe’s
securities watchdog has urged the buy-side to be more active in shaping the
future direction of securities and derivatives regulation.

Speaking at the ICI Global Trading and
Market Structure Conference in London, Verena Ross, executive director at the
European Securities and Markets Authority (ESMA), identified rules around collateral
management and automated trading as two areas she considered the buy-side
voice was lacking.

“The buy-side has historically only posted
collateral but under the new OTC derivatives rules, ESMA is supportive of a
two-way system, where collateral moves both ways,” said Ross, who previously worked for the Bank of
England and the UK’s Financial Services Authority. "This would help protect the buy-side and we are looking for greater support from them on this issue."

Under the European market infrastructure
regulation, the blueprint for Europe’s new OTC derivatives market, swaps will
be standardised where possible so they can be traded on exchange-like platforms
and centrally cleared. The rules will require buy-side firms to manage
variation margin – which reflects the change in the value of an exposure over
the lifetime of a trade – in addition to the initial amount they already pay.

ESMA delivered the technical standards –
including collateral requirements and the process for choosing which
derivatives products will be subject to trading and clearing – that underpin
the legislation to the European Commission in September. The rules are now
awaiting sign off by the European Parliament and Council of the European Union
before they are adopted into law.

Ross added that while many on the buy-side were focused on
the January 2013 deadline for EMIR implementation, many of the rules would be
phased in over a longer period.

“It is unlikely that the first clearing
obligation will come into force before 2014,” said Ross. “Each class of
derivative eligible for clearing will first need a central counterparty to be
approved and established for it.”

The ESMA director also urged greater
buy-side action in establishing the safeguards around automated trading, noting
that a buy-side specific consultation on the subject earlier this year drew a
limited response.

The watchdog released guidelines at the end
of May covering the expectations of brokers, trading venues and national
regulators when handling issues related to automated trading, including
pre-trade controls, mechanisms to halt trading and appropriate governance for
algorithmic trading development.